C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000239
SIPDISSIPDISE.O. 12958: DECL: 04/02/2022
TAGS: ENRGPRELECONEUN XG LH
SUBJECT: LITHUANIA SEEKS TO CORONATE A NATIONAL ENERGY
CHAMPION TO REALIZE ITS NUCLEAR AMBITIONS
REF: A. VILNIUS 77
Â¶B. 06 VILNIUS 637
Â¶C. 06 VILNIUS 549
Classified By: Political/Economic Section Chief Rebecca Dunham for reas
ons 1.4 (b) and (d)
Â¶1. (C) Summary: The GOL has promulgated a draft law that
outlines Lithuania's participation in the construction and
operation of a new nuclear power plant. The legislation,
which requires parliamentary approval, calls for the merger
of three energy companies to create a national energy
champion that will represent Lithuania in this multinational
project. The plan may create an entity large enough to
secure the billions of dollars necessary for Lithuania's
share of the power plant, but it does little to liberalize
the electricity market or improve Lithuania's investment
climate. Given an opportunity to emphasize private
investment in a major energy infrastructure project, the GOL
has opted instead to emphasize state control, once again
demonstrating its instinctive mistrust of private capital.
End Summary.
GOL approves draft law
----------------------
Â¶2. (C) Prime Ministerial energy advisor Saulius Specius told
us on March 27 that the cabinet earlier that day had approved
a draft law outlining Lithuania's participation in a new
nuclear power plant (NPP). He said that he had led the team
that had designed a "national investor," the legal entity
that will represent Lithuania's portion of the "implementing
company" that will issue the tender for, and eventually
operate, the new NPP. The Ministry of Economy registered the
law with the parliament on April 2; the parliament may begin
deliberation on the law as early as April 5. A member of the
parliament's Economic Committee told us that the measure may
receive fast-track treatment that could allow it to receive
full parliamentary approval within days.
Â¶3. (C) Specius said that the draft law requires Lithuania's
national investor to own at least 34 percent of the shares in
the new NPP's implementing company. Specius expects that the
Polish, Estonian, and Latvian participants will own 22
percent of the implementing company, but these portions are
subject to negotiation. He said that he expects the new NPP
have a 3200 MW capacity: either two 1600 MW reactors or four
800 MW reactors. He emphasized, however, that the draft law
did not mandate a specific capacity for the new NPP, and that
the implementing company would ultimately decide how large
the new NPP would be.
Too small to pay the piper
--------------------------
Â¶4. (C) A 3200 MW NPP, Specius said, would probably cost about
EUR 6 billion (USD 8 billion). Lithuania's investor would
therefore need to come up with about EUR 2 billion (USD 2.7
billion) to cover its 34 percent of the project. The size of
Lithuania's commitment creates a problem, he explained,
because its most obvious candidate as national investor, the
GOL-owned energy company Lietuvos Energija (LE -- Lithuanian
Energy), is too small to secure a EUR 2 billion loan. Its
earnings before interest, taxes, depreciation, and
amortization (EBITDA) last year were only about one-half that
of its Latvian counterpart, he said, and only about
one-quarter that of Estonia's national energy company. (A
representative of one of the companies likely to be in the
running to build the new NPP told us that he estimated the
total price to be closer to EUR 7 billion/USD 9.3 billion.)
Â¶5. (C) After weighing several options, Specius said that his
team concluded that the only viable solution was to re-merge
LE with the companies that operate Lithuania's two
electricity grids. (Lithuania created these companies out of
LE in 2001.) The GOL maintains a majority (approximately 71
percent) holding in the eastern grid; Germany's E.ON has a 20
percent share. The western grid, on the other hand, has been
entirely in private hands since late 2003, owned by a
subsidiary (NDX Energija) of Lithuania's largest retailer (VP
Market).
(Re)building a national champion?
---------------------------------
Â¶6. (U) Minister of Economy Vytas Navickas announced on March
23 the GOL's intention to reorganize these companies.
Instead of pursuing the GOL's long-stated intention to
completely privatize the eastern grid, he said that the GOL
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would do the opposite, merging both grids back into a newly
reformed LE. He said that LE will issue new shares that it
will swap for shares in the electricity grid companies. The
new, larger LE will then secure the loans needed to purchase
at least 34 percent of the NPP's implementing company.
Â¶7. (C) Specius said that this reorganization would give the
GOL a majority share in all three companies. Specius added
that the larger LE would be able to participate in all three
of the planned electricity projects: the new NPP, SWINDLIT
(an undersea electricity cable to Sweden), and the
Polish-Lithuania power bridge (reftels). Specius also said
that the plan would allow the GOL to avoid putting any public
money into these projects because the companies themselves
would be responsible for securing the necessary funding.
Â¶8. (U) Prime Minister Gediminas Kirkilas had sounded a
somewhat different note in January, saying in a radio
interview that the NPP project had attracted significant
international interest and that he envisioned a mix of public
and private capital in the enterprise. Lithuania's Free
Market Institute (LFMI) tried to push the GOL in this
direction, telling reporters after Kirkilas's interview that
the involvement of private investors would mitigate risk.
LFMI also encouraged the GOL to float shares of the new NPP
on the Vilnius stock market.
Don't call it nationalization
-----------------------------
Â¶9. (C) We suggested that some observers might view the
merging of these companies as the re-nationalization of
Lithuania's electricity infrastructure, which would send an
unfortunate signal to possible foreign investors. Specius
said that he expected NDX to happily participate in the
venture because it would make good business sense, but
admitted that NDX was nervous about the possibility of having
its assets under the control of management appointed by the
GOL. Specius also explained that if NDX refused to go along
with the plan, the GOL was prepared to nationalize the
company. He also insisted that the new arrangement would not
violate current EU guidelines on having separate companies
controlling the generation and distribution of electricity,
but acknowledged that rules being discussed in Brussels that
would require different ownership of generation and
distribution companies would, if enacted, complicate the
government's NPP plans.
Â¶10. (C) When asked if the GOL had consulted with the Polish,
Latvian, or Estonian governments while drafting the law,
Specius explained that they had reached a general
understanding with their partners that Lithuania should be
allowed to have a larger stake in the implementing companies
than the other countries. He made it clear, however, that
this law was a GOL creation, not the product of consultation
with its NPP partners.
Comment
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Â¶11. (C) Lithuania has many geopoliticians and few economists.
Its plans to develop the largest commercial venture ever
envisioned here reflect that correlation of forces. The NPP
project could attract considerable foreign investment, which
in turn could reduce the GOL's financial exposure for this
enormous venture with its attendant up-side risk for large
cost over-runs. The GOL seems prepared to forego that
opportunity and rush through the Parliament a hastily
conceived plan that conflates government control with
security, with little thought to the economic, competition,
and investment dimensions of the issue.
KELLY